What will luxury tax look like in Russia?

A luxury tax debated by politicians in the run-up to the election is coated with concrete figures. Russia’ Economic Development Ministry proposed a higher tax on property for individuals whose flats and houses exceed 1,000 square meters and a higher transport tax for motor vehicles with engines rated at 250 horsepower.

Prime Minister Vladimir Putin for the first time initiated the introduction of a luxury tax during his annual televised Q&A session in the middle of December, Moskovsky Komsomolets recalled. On Sunday the Economic Development Ministry proposed to raise a property tax for flats and houses exceeding 1,000 square meters and a transport tax for cars with engines rated at over 200-250 horsepower by 2013. Some experts calculated that no more than 200-300 billion roubles a year would be collected from those rich taking into account the fact that their real luxury is registered abroad. But the tax service will spend its budget funds to collect these billions. Thus, a fiscal profit will be insignificant.

“These taxes can be easily evaded,” Arkady Bryzgalin, director-general of the group of companies Taxes and Financial Law, was cited by Komsomolskaya Pravda as saying. “You can re-register a house to a legal entity that is taxed by a simplified system and that’s all you need. Another variant is to register a house in a state of constant construction. When the construction is underway and a house is not commissioned – no tax can be exempted.” Civil servants evidently play safe not to put ordinary people, who inherited a flat on Arbat in central Moscow from a grandmother, on the list of “luxurious citizens” accidentally. The main problem is to calculate coefficients in a right way, as middle class people should not pay to the budget as much as billionaires should do.

Rossiiskaya Gazeta reminds that the world experience demonstrates other forms of collecting such a tax. Thus, for instance the United States replaced this tax with a higher value added tax rate for luxury goods. “The scheme proposed by the Economic Development Ministry looks more advantageous,” the deputy head of the Higher School of Economics’ Centre for Development, Valery Mironov, was quoted by the daily as saying.

A VAT-based collection scheme is not good, as the tax is paid only once, when a purchase is made. If transport and property tax rates are increased as the Economic Development Ministry proposed, annual payments should be made.

“Moreover, if a luxury tax is collected through VAT, the risk of disrupting local production emerges. China taxed jewelries and people began to buy them abroad,” Mironov said.

Igor Nikolayev, who heads the FBC consultant company’s strategic analysis department, said in turn that the scope of wealth announced by Economic Development Minister Elvira Nabiullina is unfair for the middle class. “The main question is not how to collect a luxury tax, but what should be included on the list of luxury items,” the expert said. As for motor vehicles it is necessary to begin from 350 horsepower on the average, Nikolayev said.

He considers that a threshold of 1,000 square meters is too high. “In this issue it is necessary to begin from 500 square meters.”